PTO accrual: Everything employers need to know

Paid time off or personal time off (PTO) is a highly sought-after workplace fringe benefit that plays an important role in attracting and retaining talent in today’s competitive job market. It provides a sense of security, allowing employees to take time off to recharge or handle personal matters without financial burden. While not federally mandated, businesses often choose to offer PTO as a way to provide flexibility and reward loyalty. Typically, employees earn paid time off over time using a method of PTO accrual. 

In this article, we’ll explain the concept of PTO accrual, how it benefits your business and your employees, and how to calculate and manage it.

What is PTO accrual?

PTO accrual is the process by which employees earn paid time off (such as vacation or sick leave) incrementally over time. It is usually based on hours worked or length of service. For example, a full-time employee might accrue a set number of PTO hours for each pay period. Accrual rates vary by company and are usually explained in the organization’s vacation policy. During onboarding, HR should inform new hires about the company's PTO policy and how it works, including any restrictions or specific guidelines. Clear communication helps new employees understand their benefits and how to use them.

For the employer, a fair and transparent paid time off accrual process simplifies the management of different types of leave (e.g., vacation time, sick leave, and personal days), improves workplace morale, reduces burnout, and supports employee retention. Employers must ensure their PTO policies comply with applicable labor and employment laws.

How does accrued PTO work?

Typically, employees earn or accrue their PTO over time. Calculations are based on the accrual rates, time period, and hours or days worked. However, there are several ways that businesses can implement a PTO accrual policy. 

• Yearly accrual or annual allotment: With this method, employees are granted a fixed amount of PTO days at the beginning of each year. If the PTO is front-loaded, the employee can access their entire allotment immediately. Otherwise, the employee will earn their PTO gradually over time.
• Accrual per pay period: This is the most common method, where employees earn PTO hours based on the number of hours worked or tenure. The amount of PTO is calculated and banked every pay period. This method works well for both full-time and part-time employees.
• Unlimited PTO: This policy lets employees take as many paid days off as they need, as long as the time away doesn’t disrupt their job responsibilities. Unlimited PTO eliminates traditional accrual rates entirely. Tracking PTO can be challenging, and managers still have to approve requests for time off. 

How to calculate PTO accrual: 4 Methods

How you calculate PTO accrual depends on the method you use. These are the most common methods used by US employers: 

1. Lump sum method

The lump sum method is the easiest to calculate due to its simplicity. At the beginning of the year, employees are granted their annual PTO. 

Let’s say Henry is granted 80 hours or 10 days of time off for the year. He can take this time at any point throughout the year, as long as the request(s) meet your PTO guidelines. Any time taken is subtracted from Henry’s PTO allowance. 

Because the lump sum method is so straightforward, this PTO policy works well for smaller businesses with limited HR resources, companies with seasonal workloads, and firms with project-based work schedules. Employers should establish guidelines for new hires that start in the middle of the year and for carrying over unused PTO and termination payouts. 

2. Periodic accrual method

Periodic accrual is a common method for calculating PTO accrual. Employees earn a set amount of PTO at regular intervals during the year. It could be monthly, bi-weekly, weekly, or even daily. The interval used depends on company and workforce needs. For example, bi-weekly can align with typical pay periods. Periodic PTO accrual suits full-time and other employees with a consistent work schedule. For employers, this method helps spread out the financial liability of PTO and encourages employees to use their paid time off in smaller increments. 

Let’s look at bi-weekly frequency as an example. If Javier is granted 15 days of PTO per year, he would receive .577 days of PTO every two weeks for 26 intervals. In roughly six months (13 intervals), he would have 7.5 days of PTO available. After 26 intervals, he would have earned his total allotment of 15 days. 

3. Accrual per hour worked

Calculating PTO based on hours worked is the most complicated method, but it’s also the most accurate. Hourly accrual is ideal for part-time and hourly workers as it ensures accrual is proportional to hours worked. To determine the amount of PTO, employers need to determine the hourly accrual rate. The calculation is based on the amount of PTO offered per year divided by the number of work hours per year. This can vary quite a bit depending on your situation and policy. 

For example, if full-time employees are granted 10 PTO days per year, that equals 80 PTO hours. Most full-time employees typically work 2000 hours per year. Based on this scenario, the employee would be entitled to 0.04 hours of PTO for every hour worked. To determine the amount of PTO an employee would earn, multiply their worked hours by 0.04. If they work 80 hours, they will earn 3.2 hours of PTO. It works the same way for part-time employees that are entitled to PTO. 

4. Unlimited PTO policy

As noted above, organizations with an unlimited PTO policy allow employees to take as many days off as they want, as long as their work gets done. Unlimited PTO is growing in popularity and is currently offered by 8% of US companies. This PTO approach differs from conventional PTO policies that allot a fixed amount of PTO. With unlimited PTO, there’s no hard limit, giving employees more flexibility in how much time off they can request. It’s important to note that unlimited PTO does not mean employees can take paid time off at any time with little notice. It lets employees request (not necessarily take) an unrestricted number of days off. Approval is up to their manager’s discretion. 

Because PTO doesn’t accrue, no calculations are required. However, it’s important to have a tracking system in place to monitor the number of days each employee uses. This helps you see how well your PTO policy works and make changes as required.

Unlimited PTO is best suited for organizations with a culture of mutual trust, respect, and accountability in the workplace. It makes an excellent recruiting tool to attract talent, can help businesses save money because there’s no accrued PTO to pay out, and can improve your team’s work-life balance. However, for unlimited PTO to work, companies must implement a policy that defines clear guidelines and expectations and establishes manager approval criteria.

PTO accrual calculation examples

We’ve explored how PTO accrual works and an overview of how to calculate it. Let’s look at specific examples of calculating the different accrual methods. 

Hourly PTO accrual

With this method, the employee earns a portion of PTO for every hour they work. 

• Example: Serena accrues 0.04 hours of PTO for each hour she works
• PTO accrual rate: 0.04 hours
• Accrual period: Hourly
• Assumption: Serena works 40 hours per week
• Calculation: 0.04 hours × 40 hours/week × 52 weeks/year = 83.2 hours (approx. 10 days) of PTO per year 

Periodic PTO accrual

With this method, the calculation changes depending on the accrual period (daily, weekly, bi-weekly, or monthly). Let’s look at a couple of examples:

• Example: Tom accrues his PTO monthly
• PTO accrual rate: 1.25 days
• Accrual period: Monthly
• Assumption: Tom works full-time, 8 hours per day
• Calculation: Tom accrues 1.25 days (10 hours) × 12 months = 15 days (120 hours) of PTO per year
• Example: Blair accrues their PTO bi-weekly
• PTO accrual rate: 3.077 hours per bi-weekly pay period
• Accrual period: Bi-weekly 
• Assumption: Blair works 8 hours per day and 80 hours bi-weekly
• Calculation: Blair accrues 3.077 hours bi-weekly. 3.077 hours x 26 pay periods = 80 hours (10 days) of PTO per year

Benefits of PTO accrual for companies

Implementing a PTO accrual policy and system offers many advantages for organizations looking to enhance employee satisfaction, boost productivity, and more. 

• Enhances employee well-being: PTO provides employees with the opportunity to take a break from work pressures, engage in personal interests, and, most importantly, mentally and physically recharge. This helps reduce stress and lowers the risk of burning out. 
• Increases job satisfaction and retention: A generous and flexible PTO policy can improve employee retention by increasing job satisfaction and work-life balance. Employees are more likely to remain with an organization that proactively supports their personal and family needs. This helps reduce turnover and associated hiring costs. 
• Provides flexibility in workforce management: PTO accrual systems give employers and employees a better view of paid time off accumulation and usage. Accrual makes it easier for companies to manage leave liabilities by spreading paid time off accumulation over the entire year. Companies with accrual caps can keep on top of accumulation and associated costs. A robust PTO system lets managers track their team’s accruals and usage and create timely reports on PTO trends. This helps organizations make informed decisions about future workforce planning and time off requests. 
• Supports financial planning for both employers and employees: For employers, PTO accrual spreads out the cost of paid time off, which helps with financial planning. For employees, PTO accrual helps them budget and plan for using their leave by enabling them to track their hours and use their PTO when it best suits their needs. 
• Supports compliance with labor laws: State laws, such as those in California, can impact PTO policies by setting minimum accrual rates, carryover requirements, and other regulations. PTO accrual policies ensure businesses comply with these laws to avoid legal troubles. 

Streamline PTO management with Rippling

With Rippling, organizations of all sizes can effortlessly manage their employees’ PTO—regardless of company policy. With Rippling HRIS, employees can easily forward time off approval requests to their managers, who can quickly track PTO schedules across their teams. Leadership can also monitor and assess trends across the organization to tailor PTO policies that strike the perfect balance between employee wellbeing and productivity. Rippling enhances efficiency by reducing administrative overhead and ensures that PTO balances are accurate and compliant with employment laws in every state. And if you’re unsure about which accrual policy best suits your business, Rippling can provide access to expert HR advisors who can assess your readiness for different offerings. 

Rippling offers everything we’ve discussed in this article, plus scheduling, benefits management and much more.

PTO accrual FAQs

What is the difference between accrued and available PTO?

Accrued PTO is paid leave that an employee earns over a period of time but, depending on the employer’s PTO accrual policy, not all of it may be available for use. For example, if Mary’s PTO accrues monthly, she may have only earned part of her PTO by a particular date.

Available PTO is the amount of time off that an employee is currently entitled to take. Employers should ensure that employees are aware of company PTO policies to help them plan their time off and to avoid misunderstandings. 

How much PTO do I accrue per pay period?

The amount of PTO you accrue depends on the annual PTO you’re entitled to and the length of your pay period. Refer to the section on accrual calculation for examples.

What is the difference between lump-sum and accrued PTO?

Lump-sum PTO is an annual allotment of time off that employees receive at the beginning of each year. For employers, lump-sum PTO is easier to manage, and employees benefit from immediate access to their paid time off. 

Accrued PTO is earned over time and, in most cases, can't be used in advance. Administrating accrued PTO is more complex, but it encourages consistent attendance and limits employer liability by spreading the cost of PTO over time. 

Can you roll over accrued PTO?

It depends on an organization’s policies and the applicable state law. While no federal law prevents a “use-it-or-lose-it” policy, some states like California require unused vacation time and paid sick leave to carry over or be paid out. 

Businesses can implement PTO policies that require employees to use their PTO before the end of the year or during a specific period. Many companies have policies that let employees roll over some or all of their PTO to the next year or period. Rolling over time can add extra complexity to PTO calculations. While a “use-it-or-lose-it” policy is easier to manage and encourages employees to take their time off, employers may be inundated with last-minute vacation requests. 

Company PTO policy should be clearly communicated with employees during onboarding and to the workforce if there are any policy changes. 

Do employers have to pay out accrued time off?

Like rolling over PTO, the same caveats apply. PTO payout requirements vary significantly by state and the onus is on employers to know the applicable state laws and ensure their PTO policies comply with those regulations.

This blog is based on information available to Rippling as of November 22, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.